Don't forget your PEP!

By NEIL SIMPSON
Updated: 19:00 EST, 12 June 1999

The arrival of individual savings accounts is blinding investors to the performance of their Peps, experts warn.

More than £80 billion is tied up in Peps, much of it invested during their final months this spring.

But returns on this money could be hit if investors take their eye off the ball and assume that the only way to avoid the tax net is to leave the cash where it is.

Richard Wilson, director of fund management group Aberdeen Asset Management, says: 'The performance and effectiveness of Peps could suffer if they are neglected.

'Investors still must keep an eye on their Pep portfolios and should realise that the decisions they made when they took out their plans are not set in stone.'

Pep investors have always been free to switch from one Pep fund to another, or even switch Pep managers if they are unhappy with their investment performance or if their investment needs have changed.

This freedom has not disappeared now that Peps are closed to new business. And experts predict that it will become increasingly important to take advantage of it.

John Ions, director of fund manager SG Asset Management, says: 'For example, if you took out a Pep a decade ago, a lot might have changed in your life, let alone in the investment world.

'Fund managers may have come and gone, stock markets and investment areas may have dropped out of favour and new entrants may have come to the market offering more suitable funds for your needs.

'A Pep transfer can help you keep your investment strategy in line with your financial circumstances while keeping money out of the taxman's net.'

Most investors transfer from one Pep to another because they are unhappy with the way their plans are performing.

Research by Wolverhamptonbased independent financial adviser Torquil Clark shows that the biggest loser of Pep business this year has been investment house M&G.

It has been plagued by performance problems for several years.

Meanwhile, top-performing Jupiter funds have attracted the most transfers.

Many Pep holders also transfer because their financial priorities have changed with time.

For example, on retirement many long-term Pep investors switch from a fund aiming to produce strong capital growth to one concentrating on income.

CGU's Monthly Income fund has attracted much of this business, according to Torquil Clark.

The third main reason for transfer is to diversify an investment portfolio. For instance, someone who has paid big sums every year into UK stock market funds may wish to move some of this tax-free money into bond funds or overseas funds.

Torquil Clark says Invesco's European funds have been especially popular.

Switching a Pep is painless, but it should never be done on a whim, warns Don Clark, managing director of Torquil Clark.

Pep holders who transfer too often or too quickly may lose out. 'There are unlikely to be upfront fees for the transfer process,' he says. 'But some fund managers may deduct an exit charge from the proceeds of Pep sales.

'Then normal initial charges are likely to be levied on the subsequent investment in the new fund. 'Chasing performance can be dangerous if investors switch from one flavour-of-the-month fund to another without giving their first choice a real chance to perform. 'Investment is for the medium to long term and any fund can have the occasional poor year. Only if it really looks unable to recover, or if it is no longer suitable to your needs, should you jump ship.'

As Financial Mail revealed last week, the Pep transfer waters are also muddied by the rules over 'bundling' and on 'qualifying' and 'non-qualifying' plans.

The first problem worries fund managers, who say that if long-term investors want to transfer some of their Pep money to another provider they have to transfer all of it, in many cases turning a relatively minor investment decision into a major one.

The second problem involves investors who put cash in overseas stock markets rather than UK or European ones. They must transfer to funds with the same split between home and away markets.